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What Do CEOs Expect From a Strategic CFO? Perhaps a New Business Model

Disruption, shareholder activism, digital transformation, demographic shifts, industry convergence: these are just some of the forces that are altering the landscape in which most CFOs now operate. As these demands mount, the nature of the CFO role is evolving, with many senior finance executives devoting more of their time to strategic issues and less to traditional “steward/operator” responsibilities.

Ajit Kambil

But some CEOs would like to see their CFOs accelerate that shift. “While CFOs typically spend less than half their time ‘above the line,’ acting as strategists and catalysts, they often tell us they’d like to spend 60% of their time in those roles,” said Dr. Ajit Kambil, global research director for the Deloitte CFO Program and creator of Deloitte’s Executive Transition Labs, during a Deloitte webcast (“The CFO as strategist-catalyst partner to the CEO”). “While companies vary, our research and conversations with CEOs indicate they’d like to see their CFOs spend nearly 70% of their time in those roles, and only about 30% on steward/operator duties,” he added.

Miles Ewing

“Senior finance executives may face a number of constraints as they try to play a larger role in strategy-setting,” said Miles Ewing, principal, Deloitte Consulting LLP. “They may lack the time, or in some cases the right skillsets. In some cases the CEO may not want the CFO to play a larger role, although, as we noted, many CEOs do want CFOs to spend more time on strategy and driving change.”

“It’s important for the CEO and CFO to agree on the best posture for the CFO to adopt regarding strategy development,” Dr. Kambil noted. CFOs can act as responders, for example, providing analytics and data support to help the organization assess a new market, a potential M&A transaction or similar strategic moves. They can act as challengers, applying the necessary rigor to investment proposals in order to help ensure that revenue expectations are achieved. CFOs may adopt the role of architect, enabling financing solutions for large and complex projects (such as a business model change) so that such undertakings reach fruition as efficiently as possible.

Occasionally, CFOs can be transformers, taking key steps to shift the product and revenue mix (for example, by enabling leases as an addition to purchases CFOs may create a compelling financing structure that benefits both customers and the company).

Take a Hard Look at Your Business Model

William Ribaudo

Another, potentially more impactful way that CFOs can exert strategic influence is to partner with the CEO to revise or even reinvent the organization’s business model. Specifically, they might consider how different business models map to different levels of company valuation, and consider the implications of evolving—or failing to evolve—their current model.

“After taking a 40-year look-back at the companies in the S&P 500, it became apparent that there are basically four kinds of business models: asset builders, service providers, technology creators and network orchestrators,” noted William Ribaudo, partner, Deloitte Risk and Financial Advisory, Deloitte & Touche LLP. “Asset builders leverage physical assets, while service providers leverage human assets. Technology creators leverage intellectual property assets, and network orchestrators leverage customers and interactions,” he added, “and it’s possible for one company to have a combination of these business models.”

Asset builders, Mr. Ribaudo continued, employ a “make one, sell one” model; manufacturing is a prime example. Service providers follow a “sell one, hire one” model; a professional services firm that wants to scale, for example, will generally need to add staff to do so. Technology creators employ a “make one, sell many” model, with software and biopharma companies demonstrating the power of leveraging a new innovation across an expanding customer base, generally at little incremental cost. And network orchestrators deploy platforms that allow many participants to make and sell; examples include ride-sharing and credit-card companies, stock exchanges and social networking sites.

“One finding of Deloitte’s research into these four models,” Mr. Ribaudo said, “is that they correlate to company valuation as a percentage of annual revenue. Asset builders are, typically, valued at one to two times annual revenue, while service providers are valued at 2X to 4X. Crossing the digital divide, technology creators have a roughly 4X to 5X value, and network orchestrators tend to be worth about 8X annual revenue, sometimes reaching as high as 15X,” he noted.

According to Mr. Ribaudo, this phenomenon—the “Revenue Multiplier Effect”—has strong implications for any CFO who wants to make a more strategic impact. “If you want to drive the value of your company, it’s critical to look at your current business model and decide whether there are adjacent business models you can acquire or create in order to change how Wall Street views you,” said Mr. Ribaudo. Ultimately, Wall Street wants to understand why future profits will be greater than today’s profits, and often that can be accomplished only by a change in business model.”

CFOs, who are pivotal to business model evolution, can take five key steps to jump-start such efforts:

—Understand the company’s current business model, as well as the “mental model” that influences how people within and outside the company view it.
—Create a new “market balance sheet” that identifies and appropriately values the company’s intangible assets.
—Develop new business models that leverage those intangible assets.
—Reallocate capital to support those new business models.
—Formulate new KPIs that support the new business models and align incentives.

“The goal is to achieve a balance of tangible and intangible assets that generates greatest value for your company and shareholders,” Mr. Ribaudo said. “Currently, the financial markets appear to be placing more value on intangible assets, which makes it essential for CFOs to understand what assets they have and leverage them appropriately. Moreover, CFOs should act as a ‘translator,’ explaining to stakeholders how the company will evolve toward a new business model,” he added.

That’s not to say that every company should, or can, move to the network orchestrator quadrant. In fact, there have been notable examples of companies that were launched as virtual businesses, only to open brick-and-mortar stores at a later time to establish a physical presence. Increasingly, Mr. Ribaudo said, “We are seeing a ‘great race’ toward leveraging a mix of tangible and intangible assets. Companies that remain one-dimensional could face struggles, but those that create business models that blend the physical and the virtual are likely better positioned for success. ”

Charting a Course Toward a More Effective Partnership

As potentially profound as a business model change may be, it is not the only way in which CFOs and CEOs can forge a stronger strategic partnership. “CFOs have many ways to partner with CEOs,” Dr. Kambil noted, “and one important step in achieving that is for the CFO and CEO to ask several important questions that can help them identify and act on strategic opportunities.”

Those questions include:

—What are the dominant constraints on the organization’s growth, and how can finance be used to push back on them?
—What is the dominant uncertainty facing the organization, and what can be done to navigate it?
—What area of spending is producing the most uncertain returns, and what can be done structurally to mitigate that uncertainty?
—What could disrupt us in terms of technology, a competitor’s business model or some other force?
—How can we efficiently scale so that our revenue increases at a faster rate than our costs?
—What things can we stop doing so that we can free up capital and other resources to invest in the things we should be doing more of?

“By asking these six questions,” Dr. Kambil said, “we often find that the CFO and CEO can identify things they can improve upon immediately, seizing strategic opportunities in advance of developing a full-scale strategy.”

“Embarking on a more formal strategy process is also useful,” Dr. Kambil added, “particularly for identifying the longer-term strategy and the critical capabilities and systems needed to execute and deliver the strategy.” A structured strategy process can help the organization identify its most promising areas of differentiation, which may include an advantageous profit model, superior processes, product and service advantages, unique methods or levels of customer engagement, and other attributes.

“Beyond the process, it is critical for organizations to align capital allocation decisions—from sourcing to deploying to achieving desired returns—to their strategy,” Dr. Kambil noted. “CFOs need to work very closely with business unit leaders to align the capital allocation to the strategy and then effectively communicate how that might affect returning capital to shareholders, particularly as activists play a greater role in the marketplace.”

In most organizations the CFO already plays a strategic role. But, by working more deliberately with the CEO to clearly define that role and underscore its importance, CFOs can improve their ability to catalyze meaningful, long-lasting change. Determining the potential impact of the revenue multiplier effect on the organization’s business model may be one great place to start.

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Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.